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Uncertainty and the Choice of Trade Policy in Oligopolistic Industries

In: International Trade Agreements and Political Economy

Author

Listed:
  • RUSSELL COOPER

    (University of Iowa, USA and Hoover Institution, USA)

  • RAYMOND RIEZMAN

    (University of Iowa, USA)

Abstract

AbstractThis paper investigates the design of trade policies in an uncertain world. Governments in each of two countries select between direct quantity controls and subsidies in an attempt to shift profits in favour of domestic, imperfectly competitive firms. The equilibrium of this bilateral policy game depends critically on the variability of the environment. In a world of certainty, both governments would choose to regulate the behaviour of their firms through direct quantity controls. With a sufficient amount of uncertainty, both governments regulate their firms through subsidies. This result reflects an important tradeoff between the strategic advantages of direct quantity controls and flexibility gained by the use of subsidies.

Suggested Citation

  • Russell Cooper & Raymond Riezman, 2013. "Uncertainty and the Choice of Trade Policy in Oligopolistic Industries," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 16, pages 287-298 World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789814390125_0016
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    Keywords

    International Trade; Political Economy; Theory of International Free Trade Agreements; Customs Unions; Tariff Dynamics; Storable Votes;

    JEL classification:

    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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